Narendra Modi's reform agenda faces real test now, says Crisil

Even though price rise has broadly been under check, the present scenario of a rise in crude could be a testing one.

Many of the reforms initiated by the Narendra Modi-government are work in progress and will face challenges now as the going gets tough with rising oil prices threatening to widen current account deficit and push consumer prices up, rating firm Crisil said.

“While Modi government has chosen trend over cycle for most part of its journey so far, it will face its real test this fiscal, when the reforms agenda is likely to face headwinds. The past four years of the NDA government have been a mixed bag of good luck on oil, raft of reforms and repair, disruptions, and slower growth,” the firm said.

Crisil said that the government could accelerate financial inclusion and garner higher tax revenue through better compliances but other key areas such as employment, investment, manufacturing and rural economy have underperformed.

“There is very little fiscal and monetary room for countercyclical policies to boost growth and these would not be very effective either as most of the problems plaguing the economy – be it in manufacturing, exports, or agriculture/rural – are structural in nature and can only be addressed through reforms,” it said.

The government has avoided short-term push to growth and most of the steps taken in the past four years such as reforms relating to the power sector, the Insolvency & Bankruptcy Code and taxation, are expected to bear fruit in the medium to long run.

At a general level, macroeconomic parameters have shown improvement and lower volatility. India’s gross domestic product grew at an average 7.3% these four years, the fastest in BRICS (Brazil, Russia, India, China and South Africa), but slower than the average 7.6% in the preceding decade. Fiscal deficit was at 3.5% in FY18 compared with 4.8% in FY13, CAD collapsed to an estimated 1.9% from 3.6% and inflation fell to 4.6% from 9.5% over the same period.

“Despite better global competitiveness and ease of doing business rankings, and better macros and reforms, the business sentiment needle hasn’t moved in a material way,” Crisil said.

It observed that the sectors that generate the most employment among non-agriculture sectors – construction and manufacturing -- have underperformed. The recently released payroll data shows the economy is gradually formalising, but treating it as conclusive evidence of employment generation would be hasty.

“A decisive push to the investment cycle remains elusive. Given excess capacity and corporate focus on improving capital structure, private sector investments remain sluggish. Only a mild improvement in investments is expected this fiscal with the government’s focus on affordable housing and infrastructure creation,” it said.

The share of ‘Make in India’ initiative has grew only 80 basis points to 18% in fiscal 2018 from 2014, while the government aims to achieve 25% by 2022.

“India’s large domestic market provides a big opportunity but this would still require a huge leap in competitiveness to prevent import substitution,” Crisil said, adding that the rural economy has been riddled with challenges including slower agricultural growth, poor farm price realisation, slowdown in construction activity, and sluggish rural wage growth.

India’s direct tax compliance has however shown improvement in the past two years, following the income declaration scheme and demonetisation. Direct tax growth improved from fiscal 2016 to fiscal 2018 even as economic growth slowed while GST is expected to speed up formalisation of the economy and tax compliance further.